Fiduciary Duties Post Liquidation

In the recent case of Mitchell v Al Jaber [2024] EWCA Civ 423, the Court of Appeal confirmed that a shareholder and director may still be subject to a fiduciary duty when purporting to transfer company property, even after the company enters liquidation. The decision was made in relation to British Virgin Island (BVI) law, but on the basis of English case authorities.

Background

This case concerns a BVI Company (the Company) and the sole shareholder and director of the Company, Sheikh Mohamed Bin Issa Al Jaber (the Sheikh). 

The Sheikh, in 2008, was looking at restructuring options. The restructuring would have involved an IPO in another BVI based company, JJQ Hotels & Resorts Holding Inc (JJW Inc). In January 2009, the Sheikh had 8,038,120 shares in JJW Inc and the Company held 129,000. The Company then acquired a further 891,761 shares in JJW Inc.

The Company became subject to a winding-up order in 2011 due to a large debt owed to Unicredit Bank Austria AG and a liquidator was appointed. 

The Sheikh made numerous attempts to terminate the liquidation of the Company and the appeal was eventually dismissed by the Eastern Caribbean Court of Appeal in January 2015.

In 2016, the Sheikh then executed the sale of 891,761 shares owned by the Company. 

The High Court

Proceedings were issued in May 2019 and the trial began in February 2021. 

The liquidators at trial alleged that the Sheikh (and his daughter) acted in breach of duty by denuding the Company of its assets. The judge, however, rejected this. The judge found that the Sheikh had acted in breach of duty due to his position as constructive trustee as a result of receiving the shares. 

The Sheikh and the company which was the recipient of the shares (JJW Guernsey) were therefore ordered to pay the liquidators as equitable compensation (joint and severally). The Sheikh and JJW Guernsey then appealed the High Court's decision to the Court of Appeal.

The Issues

The judge noted that as per the decision of the Court of Appeal in Measures Ltd v Measures [1910] 2 Ch 248, under the law of England and Wales a director's powers cease once a winding-up order is made. However, this is not the case under BVI law. Under BVI law, a winding-up order means that a director's powers, functions and duties (largely) cease but are not entirely terminated. Directors therefore continue to hold office while the liquidator has control over company assets.

The Sheikh appealed on the basis that he had not committed any breach of duty, and even if there had in fact been a breach, the judge should not have ordered him to pay compensation. The Sheikh appealed that the judge's award of compensation was inappropriate due to the fact that the 891,761 shares were subject to an unpaid vendor's lien.

The three main issues for the Court of Appeal to consider were therefore:

1. Did the Sheikh commit a breach of duty;
2. Was the judge at the High Court level incorrect to award compensation (even if the Sheikh had breached his duty);
3. Were the 891,761 shares in JJW Inc subject to unpaid vendor's lien.

The Court of Appeal Decision

The Court of Appeal's main consideration in this case was to decide if the Company's sole shareholder and director was subject to a fiduciary duty when transferring the shares (i.e company property).

The judge was persuaded that "the obligations of fiduciary stewardship owed by directors are capable of continuing post-liquidation in respect of company property".

The Judgement was handed down on 26 April 2024 and the Court of Appeal held that the Sheikh was not liable in his capacity as the director of the company but, was liable as an "intermeddler". That is, a fiduciary duty had arisen as the Sheikh had purported to exercise a power held by a fiduciary.

The Court of Appeal agreed with the High Court that the Sheikh had committed a breach of fiduciary duty by causing the 891,761 shares to be transferred into JJW Guernsey's name by executing the share transfer forms. The judge also agreed with the High Court that the shares were not subject to the unpaid vendor's lien.

However, the Court of Appeal ultimately held that the liquidators had not proved any loss or that an award of compensation should be made. Therefore, the order to pay equitable compensation was set aside.

Conclusion

This case highlights the importance of directors ensuring that they do not intermeddle with company assets when they are removed as office holders. The director in this case was able to demonstrate his actions did not cause any loss, however, it can easily be seen how in a different set of circumstances there would have been a less favourable outcome for the director.

To read the full judgement, please click here.